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Hewlett-PackardHPQ -2.3514851485148514%HP Inc.U.S.: NYSEUSD15.78
-0.38-2.3514851485148514%
/Date(1481321013736-0600)/
Volume (Delayed 15m)
:
9778564AFTER HOURSUSD15.76
-0.02-0.1267427122940431%
Volume (Delayed 15m)
:
86544
P/E Ratio
11.112676056338028Market Cap
27647755520.191
Dividend Yield
3.3637515842839036% Rev. per Employee
168077More quote details and news »HPQinYour ValueYour ChangeShort position
shares are no longer a falling knife. That much is clear from their 62% rise this year and the near-doubling of the stock from its 10-year low in November to a recent $23.05.

To be sure, the company still faces many of the serious issues Barron's reported on in a cover story last year ("Game Plan for HP," Feb. 20, 2012). Half of HP's revenue comes from two big divisions, personal computers and printers, both of which are in long-term decline.

But investors don't care about all of that. What they care about are actual improvements that CEO Meg Whitman has made in her nearly 18 months on the job, which are lifting expectations for profit and brightening the prospect of the return of cash to shareholders. Those improvements are increasingly being heard on Wall Street, thanks to a charm offensive HP (ticker: HPQ) has mounted in recent weeks.

Three weeks ago, Morgan Stanley analyst Katy Huberty hosted a conference call to discuss HP's software for corporate data analysis, a tech topic du jour. Two weeks later, she raised her rating on the stock to Overweight from Equal Weight, and set a $27 price target. Huberty followed that with what CNBC billed as a rare television appearance, telling the anchors that Whitman has been "healing morale."

"HP is increasingly a name that comes up in that first round of talks with investors about where they should be putting their money. HP wasn't even part of the discussion six months ago," adds JPMorgan analyst Mark Moskowitz. He has been acting as a liaison between investors and HP's chief financial officer, Catherine Lesjak, setting up closed-door meetings in recent weeks. "They've been promoting themselves," he says of HP. "They're looking outward again."

So just what is new? Not growth, that's for sure. Revenue is expected to fall 6% in the current fiscal year, which ends in October, after a 5.4% decline last year.

But growth doesn't seem to matter for the stock to work, argues Moskowitz, who still has a Neutral rating on the shares but is impressed with progress. Shares could touch $30 without a complete transformation of the business, though it's still a "show me" story, he believes. "It's more just about cash-flow preservation, and cash-generation capabilities, and blunting the secular head winds of PCs and printing," he contends. "They are still kind of in that value turnaround mode; when those things stabilize, you could see the discussion return to growth."

With the stock trading at 6.5 times this year's expected earnings of $3.45 a share, investors seem to think the bleeding at least has been stanched. If the stock can enjoy further multiple expansion based on these marginal improvements, at seven or eight times, it could be worth upward of $33.

Although fiscal-first-quarter results, reported in February, showed declines across all of HP's businesses, there were some encouraging signs. HP's share of the worldwide personal-computer market in the calendar fourth quarter, for instance, rose to 16.7% from 15.8% a year earlier, according to IDC. This comes after two quarters of losing share to China's
Lenovo0992.hk 0.08183306055646482%Lenovo Group Ltd. ADRU.S.: OTCUSD12.23
0.010.08183306055646482%
/Date(1481325602000-0600)/
Volume (Delayed 15m)
:
21643
P/E Ratio
8.379007947382844Market Cap
6860863620.07765
Dividend Yield
2.529811937857727% Rev. per Employee
722035More quote details and news »0992.hkinYour ValueYour ChangeShort position
(0992.HongKong), a close No. 2 behind HP.

That, says PC analyst David Daoud of IDC, is the product of the company having regained some support from its sales channel by wooing distributors and retailers. "With all the disruption of the two CEOs prior to Meg, the channel was impaired, not only for PCs and printing, but also for their broader enterprise landscape," says Daoud. "Clearly, they went on an offensive to regain the confidence of the channel, and so their market ecosystem has improved by virtue of their reasserting those relationships."

Among concrete changes was a significant reduction in the number of PC models HP offers, says Moskowitz, making the portfolio less confusing to sell. And with Dell (
DELL
) now distracted by a contentious buyout, HP could show still more market-share gains.

DESPITE A PLAN TO LAY OFF an astounding 29,000 people by the end of next year, Whitman does, in fact, appear to be healing some of the morale problems, says Silicon Valley observer Rob Enderle. He was as skeptical as anyone but now thinks Whitman has done a pretty good job. "Yes, the firings hit morale," he adds, "but if you've got to cut, you cut early and cut deep, and Whitman did that, and then you start to heal the firm."

More than PCs or morale, the key to investor sentiment at the moment is improvement in the services business, which at $34.9 billion was almost a third of revenue in the last fiscal year and declined by 2%.

"I think the services business is returning to a more attractive type of growth profile, with margins in the single digits versus break-even; it would be a big thing for people to step back and say this company can make $4 a share in earnings" annually, says Moskowitz. "If they get this right, if they can re-assert themselves as a capable and competent player in services," he says, "it re-establishes the competency of the management team to drive a broader turnaround, but it also re-establishes HP's image as a broader enterprise player."

At a price/earnings ratio of 10, the stock could be worth $40, though that seems unlikely. For one thing, plenty of tech firms in better shape trade for low multiples, such as
MicrosoftMSFT 1.5735125389280447%Microsoft Corp.U.S.: NasdaqUSD61.97
0.961.5735125389280447%
/Date(1481320800308-0600)/
Volume (Delayed 15m)
:
25524405AFTER HOURSUSD62.03
0.060.09682104243989027%
Volume (Delayed 15m)
:
P/E Ratio
29.79326923076923Market Cap
474374155987.417
Dividend Yield
2.517347103437147% Rev. per Employee
745325More quote details and news »MSFTinYour ValueYour ChangeShort position
(MSFT), which fetches just 6.7 times after backing out $7 a share in net cash. HP, by contrast, has $4.68 a share in net debt.

Then, too, the recovery at HP is fragile, as larger problems remain, HP is doing better in a PC market that's still bad. In the fourth quarter, the company's share gains came even though it actually sold 1% fewer units. This year, PC industry shipments will probably fall by 1.3%, after a 3.4% drop last year, with a possible double-digit decline just this quarter. And for HP to have the kinds of innovation that will return it to growth seems a distant prospect.

For the moment, though, there is a turnaround of sorts at HP, and it looks as if it will propel the shares further before investors start worrying about those thornier issues.